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Cryptocurrency comes storming back after a blockbuster regulatory hearing on Capitol Hill

The market for digital currencies was on a tear Tuesday afternoon after two major US regulators addressed members of the Senate on cryptocurrency.

Bitcoin picked up more than 12% in afternoon trading, and the cryptocurrency market added $40 billion in value.

Regulators are taking a "do no harm approach" to the crypto market, while monitoring activity in the ICO market closely.

Lawmakers pressed the two top financial regulators during a morning hearing on cryptocurrency — and now the market for digital currency is storming back.

The price of bitcoin, which has had a bearish start to the year, soared past $7,700 during Tuesday's trading session. At the time of writing, the coin was trading up 12% against the US dollar at $7,756 — a more than $1,700 increase from its daily low set early Tuesday morning. Meanwhile, the market for digital currencies picked up more than $40 billion in market capitalization over the last 10 hours.

Tuesday's rally ramped up soon after Jay Clayton, the head of the Securities and Exchange Commission, and J. Christopher Giancarlo, the chairman of the Commodity Futures Trading Commission, addressed members of the Senate Banking, Housing, and Urban Affairs committee on the red-hot topic of bitcoin, blockchain technology, and cryptocurrency.

The long and short of the hearing: US regulators see the transformative potential within blockchain technology and cryptocurrency. But they also see a nascent market in need of more policing.

"We sort of got what we hoped for and expected," said Peter Van Valkenburgh, director of research at Coin Center, a cryptocurrency think tank based in Washington DC, in an interview with Business Insider. "We were expecting them to say 'we've got this don't worry, we have the authority to police these markets,' and that's basically what unfolded in the hearing."

"The cryptocurrency community seems to be reacting positively to what it heard today," Neeraj Agrawai, a spokesperson for Coin Center, added.

Clayton reiterated the agency's stance on initial coin offerings, a cryptocurrency twist on the IPO process. The funding mechanism, which is a darling of young tech companies, has helped some raise hundreds of millions of dollars from mostly mom-and-pop investors, although not without controversy. Already, the SEC has halted a number of ICOs through its Cyber Unit for issuing text-book securities to investors.

"There should be no misunderstanding about the law," Clayton said in prepared remarks. "When investors are offered and sold securities — which to date ICOs have largely been — they are entitled to the benefits of state and federal securities laws and sellers and other market participants must follow these laws."

Clayton and Giancarlo also praised the underlying technology behind cryptocurrencies — blockchain — and the impact the technology could have on Wall Street. Giancarlo, whose agency gave the green light on bitcoin futures in December, said it would be irresponsible for regulators to ignore that cryptocurrencies have ushered in a "paradigm shift." As such, he said the agency is taking a "do no harm approach." Here's Giancarlo:

"I believe that 'do no harm' is the right overarching approach for distributed ledger technology. With the proper balance of sound policy, regulatory oversight and private sector innovation, new technologies will allow American markets to evolve in responsible ways and continue to grow our economy and increase prosperity."

The news was well received by one crypto executive. "We welcome these comments," Bruno Wu, the head of Seven Stars Cloud, an operator of a blockchain dark pool, said.

"The total size of the cryptocurrency market is not even 1% of the legacy financial system," Wu said. "There is a big opportunity to take the infrastructure that exists in the legacy market and to update it into the crypto era."